Wanda Sports: Wander for wonders

Wanda Group, originally from Dalian, has for long been a showcase of China’s rapid urbanization. Its flagship Wanda Plazas occupy the size of a city and house many top-tier global brands. Within the group, Wanda Sports, a force in the making, may come out from the bench and play some serious kicks in 2018, a year of World Cup.

Sports Investment 2.0

Wanda’s current interest in sports surfaced at 2015 after Wanda had under its helm four listed vehicles across the US, China and Hong Kong with a combined market value of around US$53 billion. Its first move stuck out like a sore thumb, spending 45 million euro for 20 percent in Atlético de Madrid football club, one of the top three Spanish football clubs based in its capital.

The deal didn’t just arrive suddenly. It was seeded by Wanda’s DNA in football. Despite a self-inflicted red card from football in 1999, Wanda had never completely gone away. It was the 500 million yuan title sponsor of the revamped China Super League in the years between 2011 and 2013.

Disclosing that he was encouraged in person by Liu Yandong, China’s Vice Premier who had the specific responsibility on sports, Wang Jianlin, Wanda’s founder and helmsman, said the timing was right for him to step out again to help rebuilding Chinese football.

Wang also picked up another policy directive, the “Going Out”, on the base of which Wanda felt emboldened to grab, at all costs, AMC, the second largest cinema chain in the US in 2013, and then in 2015, Atletico Madrid.

Not content with a football club, just a month later Wanda acquired Infront, a World Cup marketing company headquartered in Zug, Switzerland, for 1.05 billion euro.

When unveiling the deal, a jubilant Wang came close to say that the deal was a prelude to achieving President Xi Jinping’s three-prong goals of Chinese football – “to qualify for a World Cup, to host a World Cup and [finally] to win a World Cup”.

Wanda’s winning streak continued. It bought out the World Triathlon Corporation (WTC), the ultimate promoter of the iconic “Ironman” triathlon, for US$650 million in August 2015.

Once on the hook, the addiction to the endurance games could only become more obsessive. Rolling the dice continuously, Wanda acquired, in January 2016, from the French listed Lagardere group the endurance event division which runs triathlons and marathons across the globe.

In April 2017, Wanda would partner with the World Marathon Majors (WMM) which runs the famous marathons in Boston and Tokyo, among many other races.

All in all, by the end of 2016 and early 2017, Wanda bundled these portfolios of sports assets and many others under the newly created Wanda Sports, headquartered in Guangzhou. The size of the assets had prompted Wanda to announce in a conference that it had already become the world’s biggest sports company. “It would be able to list on or before 2020,” said its chairman.

This new portfolio of assets would constitute a “Version 2.0″ investment in sports if its investments in the football club in the 1990s were considered “Version 1.0″. The key “upgrade” in the new version was, first and foremost, that the new investment was “light asset”, a buzzword at the time referring to operations that were not capital intensive.

Just when the sporting world seemed to be under its feet with IPO visible at the finishing line, however, the business world of Wanda went through rounds of upheavals.

A hit-and-run strategy

By September 2016, Wanda Commercial, one of the biggest IPOs in Hong Kong’s history, had turned into, ironically, the biggest withdrawal in the history of the bourse. Shareholders including Wang were apparently frustrated with the low valuation it was given since the 2014 IPO.

However, the financial engineering would seem to have, on hindsight, locked honk with the subsequent challenges resulting from a congruence of changes in the policy environment in 2016 and early 2017. At the bottom of them was Beijing’s annoyance with over-dependence on domestic onshore liquidity (bank debts, bonds and private money). Controversies peaked at a time of massive exodus of capital under the name of overseas acquisitions.

The first sucker punch came from banking and forex watchdogs, reflecting where all the money and resources had come from at the time. In March 2017, when the annual “Two Sessions” took place, Zhou Xiaochuan, the governor of the People’s Bank of China, China’s central bank, warned of the investment in “entertainment and football clubs”. Zhou was closely followed by Pan Gongsheung, head of State Administration of Foreign Exchange, who compared investments in overseas football clubs to “picking up the roses with thorns”.

Behind all these was also a realization in Beijing that systemic risks had built up following years of expansion in the shadow banking. A cry for deleveraging was the name of the game now. The manifestation of this high-level rhetoric was a period of sudden, drastic audit or credit review (Pai Cha), followed by the tightening of bank loans in June 2017.

The most severe damage to Wanda took place in a hitherto less followed capital market of onshore bonds. Wanda’s 17 bonds listed in the Shanghai Stock Exchange and the inter-bank debt market, with an aggregate principal amount of 87 billion yuan, fell in value 2-4 percent during a day of heavy trading. Based on limited disclosures, some banks estimated that Wanda’s interest-bearing debts amounted to 279 billion yuan at June 2017.

Adding the potential liability, obligations deriving from the privatization in 2016 and other overseas’ investments, Wanda’s total debt-like liability would amount to at least 351 billion yuan. This amount would almost double the indebtedness of Wanda Commercial when it went IPO in 2014.

Pressure had to be incredibly high when rumors such as a travel ban on Wang, many times the wealthiest man in China, resurrected once again despite denials. A breaking point reached when a hastily-arranged deal took place in which a beleaguered Wanda performed a life-saving act described by many as “martyr cutting his arm”. In July 2017, Wanda found a lifeline in Sunac and later Guangzhou R&F, both Hong Kong-listed property developers. Altogether, the deals saw that Wanda disposed a portfolio of assets worth 64 billion yuan or roughly 25 percent of its net asset value at the time.

Back to the match

The combined effect of all these on Wanda Sports was subtle.

As early as late 2016, smelling the headwind from Beijing, Wanda Sports had become uncharacteristically downbeat in public. In November 2016, with no extravagant cocktail and ballroom reception, Wanda Sports appointed a new CEO in the name of Yang Hengming, a 20-year corporate veteran of MNC giants such as McDonald’s. Again, in December 2016, Wanda was coy about the amount of the stadium’s title sponsor for its 20 percent affiliate Atletico Madrid.

Running into 2017, Wanda still managed to add one prized asset to its sports portfolio amidst the deafening noises of credit review and asset reshuffles. In June 2017, Ironman, a subsidiary of WTC (in turn a subsidiary of Wanda), quietly acquired Competitor Group Inc., another US-based race operator famous for the signature event “Rock’N Roll Marathon”, from the leverage buyout fund, Calera Capital, and its financiers.

Beyond the huff and puff of overseas’ acquisitions, and sell-offs of bonds and shares, Wanda Sports did have a business to run. After the asset disposals in June 2017, Wanda underwent a group restructuring. In Aug 2017, Wanda Culture, the second layer holding company with outstanding bonds amounting to 8.8 billion yuan, was practically demoted to little more than the book keeping unit comprising of Wanda Media, Wanda Travel and Wanda Sports.

With the house in order again, Wanda Sports staged a whole host of events and tournaments in 2017. It was indeed a busy year for the ironman-like men and women who were drawn into its eco-system. All eyes were centered in the Tour of Guangxi (Wanda’s version of the famous Tour de France), the China Cup (the inaugural four-nations football tournament approved by FIFA), triathlons (marketed as “Ironman” by Wanda Sports), the Rock ‘n’ Roll Marathon (the first ever game of such nature in Asia) and UCI BMX World Championship (a form of motorcycle racing), among others.

In the end, all these runs and sweats would translate into some kind of profit. As Wanda Sports was never part of any publicly listed subsidiary of Wanda, disclosures were limited. From the bonds disclosures of Wanda Culture, however, glimpses of its financial performance could still be picked up. For 2016, the first full year under Wanda’s belt, Infront, a crown jewel, reported revenue of 4.9 billion yuan and an operating profit of 1.5 billion yuan. For the first three months in 2017, Infront’s revenue was 1.4 billion yuan.

With regard to another major unit, WTC (parent of Ironman) reported a 2016 revenue of 1.4 billion yuan and operating profit of 507 million yuan, implying that it was about a third of the size of Infront. For the first three months of 2017, WTC had revenue of 112 million yuan.

For full year 2017, Wanda Sports reported revenue of 7.2 billion yuan on the back of around 12 percent annual growth, beating budget by 4.3 percent.

Lately, in January 2018, Wanda Sports broke the headline when it was cited to be on the lookout for an IPO. This would be on the face of it ahead of its previously indicated schedule (2020). However, with a summer World Cup looming in Moscow, 2018 would be the year ideal for actions for sports observers or football fans.

As it turned out, Wanda Sports’ race to liquidity was just a precursor to its parent’s hunts for mega deals. In the month that followed, Wanda clinched further deals with corporate China, including Tencent, Suning, JD and even Alibaba, in transactions amounting to nearly 41 billion yuan.

Whether it is at a crossroad or in front of a finishing line, Wanda Sports, which carries the gene of ironman in sports and surrounded by a cast of (heroic) characters from Wanda’s media library, should be able to make wonders, with or without the IPO.

Note: This article is an extract of a chapter from The Business of Football in China, a forthcoming book by the author.

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